Hong Kong’s economic activity likely to remain sluggish in coming quarters

The economic activity of Hong Kong is expected to remain quite sluggish in quarters ahead, negatively impacted by subdued global and Chinese demand, noted Scotiabank in a research report. Over half of the nation’s exports are shipped to mainland China.

Hong Kong’s real GDP momentum bolstered in  the second quarter with output growing 1.7 percent year-on-year despite the challenging global environment for export oriented economies. In the first quarter, Hong Kong’s economy had gained 0.8 percent year-on-year.

While private consumption continues to be the key driver of the economic growth, consumer spending outlook might decline because of local asset price adjustments and emerging signs of weaker demand for labor, according to Scotiabank. On the back of Hong Kong’s sound fiscal position, public sector outlays are able to give support to the economic activity.

“We expect Hong Kong’s real GDP to expand by 1.4% this year and 1.8% in 2017”, added Scotiabank.

US monetary policy is major determining factor of Hong Kong’s interest rates because of the fixed exchange rate. The Hong Kong Monetary Authority hiked the base rate by 25 basis points to 0.75 percent after the first rate hike by the US Fed in December 2015. Local interest rates are expected to move consistently with developments in the US. The Hong Kong central bank is unlikely to raise rates in the near term.

Meanwhile, headline inflation in the country is expected to continue slowing in the months ahead. Consumer prices in July rose 2.3 percent year-on-year, decelerated from the recent peak of 3 percent year-on-year recorded in February.

“Given a stable USDHKD exchange rate and persistently low oil prices, we expect inflation to close the year at around 1½ percent y/y”, noted Scotiabank.